Investors seem to be shrugging off the noise surrounding Brexit according to iFunds, as its momentum-based strategy has propelled it towards investing in UK small, mid and large caps.
The iFunds portfolios follow a quantitative momentum strategy, which passively allocates to indices delivering what it deems to be the best risk-adjusted returns. As of late, this has become heavily skewed towards UK and European equities.
The funds, labelled Orange, Green and Indigo and differentiated by volatility targets, now have exposure to three UK indices for the first time since May 2015, covering small, medium and large caps.
Stacey Ash, director and investment manager at iFunds, said: “There are an awful lot of worries about Brexit, but the FTSE 100 is hugely benefiting from the weakness of sterling.
“Then the interesting thing is how the rally has spread beyond just the large caps; investors have clearly started to favour the entire spectrum. I can only speculate as to the reasons for that – it could be a value play.”
The iFunds portfolios consist of cash and 10 exchange-traded funds (ETFs), which track the 10 most attractive indices at any one time based on the firm’s quantitative risk-based model.
This is from a universe that consists of developed and emerging market equities, bonds, commodities and property. The renewed popularity of the UK has been matched by European equities, which have entered the iFunds portfolios recently at the expense of US equities.
The iFunds quantitative momentum metric has led the S&P 500 and US mid-cap ETFs to drop out of portfolios recently, as volatility picked up in the US following the failure of the Republican healthcare bill. This called into question the new administration’s ability to pass growth-enhancing measures.
The US ETFs have been replaced by two European equity products, one tracking mid caps and a dividend-weighted smart beta strategy.
Mr Ash said it was likely the rotation out of US into European equities was a reflection of currency moves, with the US dollar having weakened in recent weeks.
The rotation represents a big change for the iFunds portfolios, where investments in the US have dominated the return profile. In the past three years, four out of the five indices delivering the most have been in the US; tracking small, mid and large caps and a dividend-weighted product.
Although equities dominate the iFunds portfolios currently, the funds also have high weightings in cash due to market uncertainty. The iFunds Green portfolio, its medium-risk fund, currently has 45 per cent of its portfolio invested in cash, with the rest in equities.
Mr Ash said the fund’s cash level had been between 40 per cent and 50 per cent since summer 2016 – the longest time the fund had spent with such high cash levels since launch.
“There have been very polarised views, for example with Brexit and Trump, and that creates volatility,” said Mr Ash.
The iFunds Green portfolio has returned 20 per cent over three years, compared with 18 per cent for its six-month Libor plus 5 per cent benchmark.
